Mark Thoma of Economist’s View has an interesting back-and-forth between Jeffrey Sachs and Paul Krugman excerpted from their op-ed and column, respectively, on Dr. Krugmans’s Keynesian prescriptions for solving our economic woes. It’s relatively brief and I can’t excerpt from it without recapitulating it so I recommend reading it in full. I honestly don’t know what to make of it. A few random observations.
First, what Dr. Sachs refers to as “crude Keynesianism” which he attributes to Dr. Krugman is what I’ve been calling “folk Keynesianism”.
empirical ace; ace;adjective
1 : originating in or based on observation or experience
2 : relying on experience or observation alone often without due regard for system and theory
3 : capable of being verified or disproved by observation or experiment
Models are not empirical evidence. They may be derived from data, “observation or experience”, but they are not data. Models prove consistency, i.e. that your conclusions follow from your premises, rather than truth, that your premises are actually correct (and your conclusions follow from them).
As I understand it Dr. Krugman’s explanation of events depends on our being in a liquidity trap, i.e. that people are hoarding cash. Is there really dispositive evidence of this? Can we be in a liquidity trap and have the savings rate go down, as has been the case for the last several years? Is a liquidity trap consistent with very rapid price increases and, consequently, much more money being spent on them, on goods and services consumed by the highest income earners?
I think my own folk Keynesianism, i.e. “spend during recessions, pay down debt during recoveries”, is actually somewhat closer to what Lord Keynes wrote about than what both Drs. Krugman and Thoma are advocating which I would bowdlerize as “spend during recoveries, spend faster during recessions”. That may not be indifferent to the public debt but it sure looks like the next best thing. I would also note that the recovery, such as it is, began in June 2009.
Since there doesn’t seem to be an empirical method of determining whether you’re in a liquidity trap, why is Dr. Krugman’s changing prescriptions between Republican administrations and Democratic administrations not “tax during Republican administrations, spend during Democratic administrations”?
Aren’t there simpler explanations for what’s been happening? For example, unforeseen effects (or foreseen, as some are contending) of policy that have resulted in increasing income inequality? A flight to quality?
Finally, if the problem is that people are hoarding cash because they’re uncertain about the future, isn’t the solution building up their certainty? Go back and look at the last six years. It doesn’t look anybody’s bucking people’s confidence up much to me.